The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

On August 29, 2010, CTV Calgary posted an article written by the Canadian Press entitled "Repealing HST possible; but expensive: expert".  I, Cyndee Todgham Cherniak, was one of the experts quoted in the article.

I actually think that the expense of repealing/reversing/ending harmonized sales tax (HST) in British Columbia is somewhat overstated in the article.  The federal government could treat any monies paid under the CITCA and amendment (less than $1 Billion at this time) as a pre-payment of other monies over as transfer payments.  So, it is not that British Columbia would have to find approximately $1 Billion in the provincial bank account and write a big cheque.  It may be that the Province would receive a smaller cheque from the Federal Government than what was hoped or expected as a transfer payment.

So, in a sense, ending HST in BC would be easy.  But, that is too simplistic because businesses would be affected by the change.  In the sense that businesses must implement changes in their record keeping to return to the previous sales tax regime, ending HST is not something that should occur overnight.  It would not be wise to announce that HST is ending and BC social services tax is restarting - on the date of the announcement. 

It would be wise for Premier Campbell to pick a date in the future that allows a reasonable adjustment time. That being said, if the B.C. Supreme Court issues its decision in the judicial review on the constitutionality of the implementation of HST in B.C. and finds that a required procedural step was not taken, the court would not be able to ignore its finding on unconstitutionality and grant the province authority to continue to permit the unconstitutional tax to be collected.

What this means is that the Premier is playing with fire by not settling the judicial review (so that a decision is not issued) and not agreeing to end HST.  Premier Campbell could settle the judicial review and agree with the Petitioner for a reasonable time-table for the unwinding of HST in British Columbia.  The Premier may also wait for the court's decision in the judicial review and, if unsuccessful, file an appeal.  But, imaging what the people of British Columbia would say if the court says the HST is imposed unconstitutionally and the Premier does not look out for their interests?

I have said many times that what is happening in British Columbia will be in the history books someday.  I just do not know what will be the story.

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In August 2010, the Ontario Ministry of Revenue issued Tax Tip #19 "Purchase Exemption Certificates" directed at resellers of taxable insurance (insurance premiums).  The Ministry wrote:

This information will help purchasers understand when a valid Purchase Exemption Certificate (PEC) may be used.

Claiming RST Exemptions

Retail Sales Tax (RST) will continue to apply to premiums paid under a contract of insurance or benefits plan after June 30, 2010. Some purchasers may be entitled to an exemption from RST. To claim the exemption, the purchaser is required to provide the seller with a valid PEC.

Examples where a PEC may be used by the purchaser to acquire insurance products exempt from RST include:

- Contract of insurance on agricultural products, structures, equipment, livestock and recreational equipment purchased by a person actively engaged in the business of farming

- Cargo insurance for the portion where the risk is not in Ontario

- Contracts of insurance in respect of an aircraft where the purchaser of the aircraft is exempt from RST

- Contracts of Insurance entered into by Indian Bands or Band Councils.

Information Required on a PEC

A valid PEC must show:

- Name of person or name of business•

- Address•

- Name of authorized person•

- Vendor permit number, if it applies•

- Reason exemption is being claimed•

- Date the PEC is issued•

This information is useful to the small handful of persons still caught in the Ontario retail sales tax regime (where a life of input tax credits and a single sales tax did not start on July 1, 2010).  what is missing is the useful guidance on who need to know this information --- this Ministry should of started with "For Whom it May Concerns - you know who you are - don't ask us to send you this Tip, we hope you find it on your own". 

Please let me help by identifying the class of persons who might benefit from this notice - it is buyers of taxable insurance (under the Retail Sales Tax Act (Ontario) who are not the final user or consumer.  It is relevant for those persons who resell the insurance such that another purchaser is downstream.  The purchase exemption certificate allows the middleman to not have to pay ORST and apply for a refund to get it back.

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Disbursements have been an issue under the goods and services tax (GST) and will become a more complex issue with harmonized sales tax (HST).  When I speak about disbursements, I am talking additional charges or expenses incurred by the service providers, such as parking, filing fees, photocopies, etc. that are billed to the client with the fees for services.

As a general rule, disbursements take on the same GST/HST character as the underlying supply of services.

In 2004, the Canada Revenue Agency (CRA)  reissued Policy Statement P-209R "Lawyer's Disbursements" and indicated that they took the position that there are two categories of disbursements that may be found on a lawyer's bill:

1) Expenses/disbursements incurred by the lawyer as agent for the client; and

2) Expenses/disbursements not incurred as agent for the client.

The expenses/disbursements incurred as agent may be passed on to the client without additional GST/HST (however, the service provider should not take an input tax credit and then not charge GST/HST as the GST/HST should be passed to the recipient).

The same two categories apply to other service providers.  However, depending on the nature of the services, it may be that for other service providers expenses are not normally incurred in the context of an agency.  As a result, it is important to understand the CRA's administrative position:

The phrase “incurred as agent” indicates that the disbursement described is generally incurred in a lawyer's capacity as agent for a particular client. As such, no GST/HST is exigible on the subsequent reimbursement by the client. The phrase “not incurred as agent” indicates that the disbursement described is generally incurred otherwise than in a lawyer's capacity as agent for a particular client. As such, GST/HST is exigible on the subsequent reimbursement by the client (to the extent that GST/HST is exigible on the consideration for the service provided by the lawyer to the client). The characterization of each disbursement is based on the application of the principles of agency to a typical transaction involving that disbursement.Policy statement P-182R, Agency was used as the basis for this analysis.

In 2010, there have been two important court cases that provide additional guidance on the issue of disbursements (Merchant Law Group v The President of the Canada Revenue Agency (FCA); Roberge Transport Inc. v. The Queen (TCC).  Both cases give guidance that a court will consider as relevant whether the parties had an agency agreement (or some statement concerning the expenses being incurred as agent) in place to support the arguments that the expenses where incurred in the context of an agency. The Roberge Transport case is important to review because it is written by Justice Steven D'Arcy, who was one of the leading GST lawyers in the country before joining the bench in 2009.

Service providers, therefore, should follow the existing policy statement and add what may be taken from the cases.

There are many complex situations where the HST treatment of disbursements will become relevant.

Example 1:  A service provider pays a filing fee to a municipality in circumstances where the filing fee is exempt for GST/HST purposes.   The service provider may be required to charge HST when it bills the disbursement when the service provider is not an agent for the client.

Example 2: A service provider in an HST province (e.g. Ontario) retains a service provider on a sub-contract basis in a non-HST province (e.g., Manitoba) and pays the service provider's invoice and includes the disbursement on the Ontario service provider's invoice to the client.

Example 3: A trucking company providers trucking services to a Canadian manufacturer and incurs inter-provincial fuel taxes that it invoices the client as a disbursement. If the trucking company is not acting as an agent, there may be HST on the incurred taxes depending on the facts.

The answers re whether HST must be charged in respect of a particular disbursement will depend upon the facts.  I can tell you that businesses need more clarification regarding this subject.

My best advice is to read the Policy Statement on "Agency" and "Lawyer's Disbursements" and clearly state in retainer letters and contracts which expenses and disbursements will be incurred as agent for the client.  The list will depend on the business activities and usual disbursements.  You should seek help compiling the "Incurred as Agent" listing.

In addition, it is better to be consistent in your approach to billing disbursements. A billing policy is helpful and should be provided to all sales and billing staff.  Arguments will have greater persuasive value if it can be shown that a particular type of expense is always treated in a certain manner (usually as incurred as agent in order to not charge GST/HST).

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On February 20, 1991, then Finance Minister Michael Wilson announced in Department of Finance press release 91-023 that the Federal Government of Canada and the Government of Saskatchewan had signed a Memorandum of Understanding which provides for the harmonization of the provincial sales tax with the very new goods and services tax ("HST").  I have a copy of this press release from Carswell's Canada GST Service (pages R687-694 in the "Historical" binder), but have not received permission yet to attach the photocopy.  The harmonization was to occur on January 1, 1992; but never did.

At the time of the press release in 1991, Grant Devine was the premier of Saskatchewan.  A few months later he had been voted out of office and Roy Romanow was the premier of Saskatchewan. During the election campaign, the proposed tax harmonization was a hot topic and public opposition was fierce.  Due to the public opposition to the sales tax harmonization plan, Premier Roy Romanow scrapped the sales tax harmonization plans and to this day Saskatchewan does not have an HST.  Harmonization legislation was not drafted (or should I say completed and released publicly) by the federal Department of Finance until 1997 when Nova Scotia, New Brunswick and Newfoundland/Labrador decided to implement the HST.

Former Premier Grant Devine became the Premier of Saskatchewan in the 1982 after his Progressive Conservative Party won the most seats (55 of 64 seats) in the provincial election.  His government was re-elected in 1986.  During the 1991 election, the Progressive Conservatives won only 10 of 66 seats and both the Devine PC government and the HST were history.  In 2004, Grant Devine sought to enter the federal political arena as a candidate, but was not accepted by the federal PC Party. 

In 1991, the New Democratic party won the election in Saskatchewan.  Roy Romanow became premier and held that position through two elections (1991-2001). Former Premier Lorne Calvert replaced Roy Romanow as NDP leader and premier of Saskatchewan (2001-2007).  Calvert and his government were defeated in 2007 by the Saskatchewan Party and Brad Wall became premier (2007 to present).  The Saskatchewan Party is a coalition of members of the Saskatchewan PC and Liberal parties, but is not the result of a merger.  Technically, the Saskatchewan PC party still exists, but is dormant so to speak.  It can, therefore, be said that the PC party in Saskatchewan did not recover after the failed HST attempt.

Back to the February 20, 1991 Department of Finance press release - Michael Wilson's press release and the backgrounder included statements about how the harmonized sales tax would be better for businesses.  It included statements about how single tax administration would result in economic efficiency and cost savings to businesses.  The people of Saskatchewan did not accept these statements as evidenced by the thrashing the initiators of the HST experienced (both federal and provincial PC parties) during the post announcement elections.

If one considers the Saskatchewan experience and then looks at the anti-HST movement in British Columbia, one should be able to see more clearly how the people can have a strong voice.

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On August 11, 2010, British Columbia's Chief Elections Officer announced that the anti-HST petition met the requirements of the Recall and Initiative Act. More than 700,000 B.C. voters signed the anti-HST petition.  The determination that the petition meets the signatures criteria sets the stage for a new vote on the implementation HST by the B.C. legislature or a possible referendum. This is and will continue to be a historic example of voter engagement and government accountability.

It is the first time a petition has been upheld since Canada’s only law allowing such petitions was enacted in B.C. in 1995.  While this is an important milestone, the future of the HST in British Columbia remains uncertain.  The Chief Elections Officer said that he will not do anything until a court case against the petition is dealt with in the courts. So, the HST is not dead yet.

Former Premier Bill Vander Zalm and the leader of the anti-HST movement made a very important observation:

“Every Liberal MLA is vulnerable as of today ... We will recall every MLA, every Liberal MLA if need be."

This observation (which may come across to some as a passing statement) is so important because it addresses the fundamental issue of accountability.  What Vander Zalm is saying is that each Liberal MLA who was elected in the 2009 election in the province will be held accountable before the next election.  MLAs are elected by the people and are not given a license to do whatever they please - especially impose new taxes on the people without the approval of the people.

While it is true that most government matters are left by the people to the elected MLAs, there are situations, such as the implementation of the HST, which cause the people to respond and ask for a reconsideration of a proposed action to be taken or action taken by government.  The anti-HST petition is one of those rare situations.

Should all provinces have similar legislation to the Recall and Initiative Act?  Arguably, the answer is "YES".  Arguably, there needs to be mechanism for the people to hold up a big "STOP" sign and ask the government to listen to opposition.  The elected officials should not turn to the voters who elected them and say they are smarter than the voters and they know what is best for the voter and that the voter should "SHUT UP".  If the elected officials will not voluntarily listen to a large number of people, such recall legislation is a check and balance on democratic principles.

I think I hear Bill Vander Zalm saying "Can you hear us now?"

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This is so exciting (NOT) - It is August 2010 and this means that some businesses that are in a net refund position (that is, their input tax credits exceed their GST/HST collected) may be filing their GST/HST returns for the month of July 2010.  The businesses that would file their GST/HST returns early would most likely be monthly filers.  Some examples are builders of multi-unit residential complexes, persons who made a large purchase of equipment in July 2010 due to the recoverability of HST, exporters and exempt entities.

July 2010 has now ended (months seem to come and go so much more quickly).  Businesses will be working on their records and filing their GST/HST returns (many must now file electronically).

The first GST/HST return must include HST collected during the transition period - please do not forget.  All HST must be remitted to the Receiver General of Canada - do not send it to the ontario Ministry of Finance.

When calculating input tax credits, please include all GST/HST paid or payable before August 1, 2010.  If you are a large business, do not offset the recaptured ITCs against the ITCs collected number - it has its own line on the GST/HST return.

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